wrong tool

In my career, I’ve chosen to work at larger companies instead of smaller ones. Or maybe, a better way to describe it, is that I have joined small sized businesses that became enormous.

And I was reflecting on the differences.

My favorite game of all time is Civilization II. Some players, like the beginning game:

The point is that you have the fewest pre-existing constraints. You can only make a small number of decisions. And each decision is a matter of life or death. You can very easily get destroyed if you make the wrong choices.

That part of the game is the most intense because every decision is, of course, critical, every moment obviously a life or death moment. You choose to explore a village, and if it turns out to be barbarians and you don’t have an army you lose the game.

In the later phases of the game, you have many cities and an accumulation of decisions. You can quickly destroy other civilizations, build wonders, and typically there is no existential threat. No decision is obviously existential. No crisis is obviously critical.

There are existential threats; they are just not obvious.

The challenge in this part of the game is how to marshall resources and make decisions to win the end-game while ignoring things that are not important.

When you join a large company, you are essentially being given someone else’s Civ game. Your job is to figure out what decisions your predecessors made that are prescient and build on those while figuring out what new decisions need to be made to win.

The funny thing about joining a Civ game in the middle phase is that you may have already lost. Some decisions made early on may have put your civilization in a terrible spot that are only obvious now.

And for many folks, this makes starting a game more attractive than taking on an existing game.

The funny thing is that when you launch a new game, the computer makes decisions for you, and those decisions, when combined with your preferred strategy, will doom you just as much.

The thing about the early part of the game is that when you lose you’re just a historical footnote, a leader of a small tribe. When you lose later on in the game, you may have a large thriving civilization that just didn’t make it to the finish line. You fail as a CEO of 10 person startup, and only your web page records your failure. You fail as the CEO of Yahoo, and it’s front page news on the WSJ.

The later part of the game in Civilization II can be more thrilling. You get to do more stuff, try more things, you are on a bigger stage and you are playing for all of the marbles instead of a chance at all of the marbles.

 

 

 

 

 

Yesterday, I wrote about the problems with Unicorns and their preferential treatments of investors.

Today, I wanted to make the asymmetry realer.

Consider the decision facing the board when it had an 825 million dollar deal on the table.

The board was considering four options in that order

1. Go public and be valued at more than 1 billion
2. Accept an 825 million dollar deal
3. Sell at a lot less
4. Keep struggling alon

The board, probably feeling optimistic decided to skip the 825 million dollar deal because the board felt that the upside of an IPO was worth the risk.

The question is what risk was the board considering and are these aligned for all stakeholders.

For the preferred investor, option 3 is more valuable than option 4 and for the employees option 3 is not an option worth considering.

Let’s explain it with numbers.

If the deal closes at 825 million, preferred investors make ~4$ a share. If the deal closes at 425 million, the preferred investors make 3$ a share. If the IPO happens, the preferred investors may make 5$ a share.

If you think that an IPO has a 20% chance of happening and a 425 million dollar deal has a 70% of happening then what you are doing is saying I am taking a chance at 20% upside with a 25% downside. Not a bad bet. Especially, if the downside bet is still a positive outcome. Option 4, continue to go at it is the worst option because the downside risk is to lose everything.

For the employees, however, an 825 million acquisition is worth 4$ a share, and a deal at 425 million is worth 0.44$ a share and is no different than struggling along. Your stock is worthless at 425 million so you might as well keep trying.

And if I were an employee, I would like the choices the board to be 1, 2 and 4, whereas the board is incented to choose between 1, 2 and 3.

And because the employees are not a stakeholder and not even a shareholder, the right decision for the preferred investors was made.

In all of my posts, I keep pointing out that the problem with a Unicorn is that the board structure and ownership structure is not aligned with the interests of the employees who are not senior investors. For the most part, employees are junior investors. And in any liquidity event, the senior investors will be made whole before the junior investors.

The latest Unicorpse, Good, is a good example of  the problems with boards. The employee interests and board interests are not aligned.

Preferred stock is different from common: Since Good’s venture-capital investors were first in line to be paid back, turning down the deal in March was less risky for them than it was for common-shareholder employees. Both the preferred shareholders and the common shareholders would do much better at $1.5 billion than at $825 million, but the preferred shareholders wouldn’t (and didn’t) do too much worse at $425 million than at $825 million. The common shareholders did much, much worse. As Felix Salmon says, “the huge problem is divergent incentives between common and preferred,” and the board of directors was aligned with the preferred.

Remember the preferred investors have different interests than employees. Employees want to maximize their investments. A startup is an attempt to make a lot of money. An investor has other interests and may want to liquidate a position.

For example, a preferred investor may want to free up capital for better investments, or may want to return money to LP’s or get out of an investment. And in those scenarios the Good exit, is a reasonable exit.

And so we have the perfect storm. The Good preferred investors took a calculated risk with limited downside when they turned down the 825 million deal, unfortunately, for the employees, the downside risk of not taking the 825 million dollars was much larger. When the deal closed, the preferred investors didn’t do badly. The employees got screwed.

The current funding environment is very dangerous to the valley and to employees.

As always, double check the fine print, understand the board motivations and make sure that you go into any situation with your eyes wide open.

 

In Dana Jr’s book, we learn of the power of the captain of a ship to control his employees. Stuck on a boat, on the edge of the known world, with no way to get back home, the sailor lived and died at the whim of a captain. And what struck me, as the most horrifying part of all, was that a sailor who signed on for two years could suddenly find himself signed on for 10 or 12 if the captain os the captain’s employers so decided.

Employees at startups are like sailors on a boat. The early founders are like the captain sitting behind the mast in their more comfortable digs. The investors are like the people who invested on the journey and expected the captain to return with something. The employees are like Dana Jr, promised a fun trip and profit while living in squalid and miserable conditions.

Wired just wrote about what I have been talking about for some time; the system can be very rigged against employees.

Again, every company is different. And you should have your lawyer or an HR person who does not work for your new employer review all and any of your paperwork.

Why write about this again?

1. Companies are staying private for 11 years. And why not, the senior investors – founders and early investors – don’t have to IPO to get liquidity. Mezzanine investors and later employees are stuck waiting for a liquidity event for a very long time. There is a big difference between 4-5 years and 7-11 years
2. The secondary market that I hoped would help is closed.
3. There is nothing to push a private company to go public with the JOBS Act. The 500 shareholder minimum got removed.  A private company that has access to capital is cash rich, and whose core founders and investors are well off, has no reason to go public. For a consumer company, that is particularly true. For enterprise customers, potentially less so. Customers of enterprise customers like to see your financials before they buy your products.

You can get stuck in a Roach Motel if you work for a startup.

There is a real danger here.

 

Growing up, one of my favorite positioning of products was the Roach Motel, a cockroach trap.

The trap used a scent to lure the cockroach into the trap and then used poison bait to kill the pest.

The Roach Motel entered the vernacular through their clever slogan:

Roaches check in, but they don’t check out!

Turns out Unicorns with cleverly structured stock compensation programs are no better than The Roach Motel for employees that join.

Let’s be concrete.

If you join VMware, the minute you vest your shares there is a large public liquid market that you can turn those shares into cash. There are no restrictions on how many shares you can sell. The only restriction on selling them is if you have material information that makes you an insider.

If you join a startup, the shares are vested, and you can’t sell a single share until some liquidity event happens.

No problem, you think to yourself. I will just wait until the company IPO…

But what if you have to quit your job?

Well then that’s okay, you can just …

Um.

There are two options

(1)  If they are options you just buy them and take them with you. Except you may not have a large pile of cash that you can use to buy them with. And unless you made money at your last startup you probably don’t have that kind of money. And so you lose them.

Except that some stock plans may not give you that option. Because they don’t want anyone to own the shares outright until after a liquidity event that is not an employee of the company or a direct investor.

Even if you, had the cash, you may not be able to.

Well it’s a litle more nuanced. You do have the right to buy the shares, and then the company has the right to buy them back from you when you are leaving at what they think is the fair market value.

See what happened to Skype employees. http://techcrunch.com/2011/06/26/skypes-worthless-employee-stock-option-plan-heres-why-they-did-it/

This kind of behavior is not as uncommon as you think.

(2) I will take my RSU’s and run!

Again companies can do the same thing…. You get your RSU’s and if you leave the company you lose them. More precisely they get sold back to the company at the price the company decides.

So what to do?

The short version, is that don’t assume your equity in a Unicorn is yours. Make sure you get a lawyer or a person in HR that doesn’t work at the company to walk you through the agreement for any specific time bombs.

And remember rules can change capriciously later.

For Valley employees, Unicorns with their ever receding IPO dates, their preferential treatment of founders and early investors are increasingly looking like a Roach Motel where employees can join with the promise of future fortune where none is to be found.

 

 

 

In my last couple of jobs, I’ve had to define technology leadership. And, in particular, how it relates to code.

The motivation in one job was that the engineers and management had passed the accountability buck to the process. The motivation in another job was to codify well-understood practices.

Each slide deck was different. And had specifics, and so I can’t share the deck’s as is, and I figured other people might be interested to know how I think about it.

When working on accountability and responsibility, the first problem is defining the terms. Here’s the definition I used that I borrowed heavily from several RACI websites.

To me, the fundamental intuition is that the accountable party makes the call, and the responsible party owns making sure that it’s the right call.

The next question is, what is technology leadership, and why is it important.

The key points are that technology leadership is about building great products, and great products are a function of product management, great technologies, great teams, and great sales and that technology leaders are responsible for all of those.

One thing that gets lost in discussions about technology leadership is the role of management. Managers are a vital player in this party. And in many ways, I view managers and technology leaders as separate actors.

You’ll notice managers are accountable for planning and team quality and execution, and technology leaders are accountable for technology and quality and the quality of the artifacts produced. And they are, in turn, responsible for what the other guys are accountable for.

If your technology leader and manager are the same, my experience is that you either get a better quality product with missed dates or get worse quality on time.

And this creates tension, especially on the dates.

The point is that the technology leader and manager should not see this tension as a winner takes all battle, and instead view this as a conflict whose purpose is to force a compromise that delights the customer.  A poorly architected product is as big a failure but that ships on time is as big a failure as well-architected product that ships late.

 

And the conflict is desired. It’s not an accident. You create the tension to force the compromise. And the compromise is a good thing if it produces an outcome that is aligned with delighting our customers.